top of mindThe Fallout From FraudWhen an agent undertakes rogue activities, could a broker bedeemed a responsible party?

It’s a concern all brokers have. An agent gets in trouble while acting outside the scope of his or her duties, and the
broker gets dragged into a lawsuit as a
responsible party.

A recent decision by the Ohio Supreme Court addressed this issue in a
case involving a fraud allegation against
an agent, who maintained a property
management company and a remodeling
operation without the broker’s knowledge.

In a situation like this, it’s critical that
the broker be able to say whether or
not he knew about the agent’s actions,
because if the broker didn’t and couldn’t
know what was going on, then he at least
has a defensible position that he should
not share in the liability for the agent’s
actions. But what if the broker is precluded from even arguing that he had no
knowledge of what was going on?

That’s exactly the situation brokers in
Ohio were facing when a state appellate
court ruled last year that a broker, by
having participated in the agent’s commissions on the transaction, wasn’t allowed
to make the case to a jury that he didn’t
know about what was happening and that
the agent was acting outside the scope
of her duties. The Ohio Supreme Court in
August reversed the appellate court ruling,
and now the liability issue is once again
consistent with the law in other states.

NAR and the Ohio Association ofREALTORS® played key roles in thevictory. NAR filed a friend-of-the-courtbrief that made it clear the Ohio appel-late court decision was restrictive to adegree not seen in neighboring statesand possibly the rest of the country. AnOAR analysis showed how deeply at oddsthe decision was with related laws anddecisions in the state.

At the heart of the issue is the broker’s
participation in the commissions. The
appellate court ruling made the broker
sharing in the commissions tantamount
to having responsibility over the agent’s
actions, regardless of whether the
actions were within the agent’s scope of
duties. But the Supreme Court—rightly—
made it clear that participation in commissions is not in and of itself sufficient
to make the broker liable for actions he
doesn’t even know about and shouldn’t
necessarily even know about, since the
actions weren’t within the agent’s duties.

In this case, the agent helped a client
buy several properties for rentals and, as
part of their arrangement, the agent also
agreed to use her remodeling operation to
fix up the properties and her management
operations to oversee the rentals. After the
properties were acquired, the agent did
few if any repairs and otherwise failed to
perform as promised. When the properties
generated no income, the owner sued the
agent for fraud and included the broker for
failing to exercise oversight of the agent.

But the broker had no knowledge of theagent’s rogue activities. In fact, the owner’sattorney never even made a claim to thecontrary, and there was some evidencethat the agent tried to conceal her actionsfrom the broker.

While the decision by the Ohio Supreme Court affects only cases in Ohio,
had the appellate court ruling stood,
the implications could have been much
broader. Simply by taking up the case,
the Ohio Supreme Court was signaling
the importance of the issue. As similar
liability claims are made elsewhere, it’s
likely the courts in other states would
consider the legal rationale applied by the
appellate court, and that legal reasoning
could find its way into other decisions.

Ohio brokers not involved in the case
have said, had the ruling stood, they
would have left the business. Why?
Because the ruling opened the possibility
of potentially ruinous legal exposure and
adverse publicity from actions taken
independently by their agents. To make
matters worse, they would have no ability
to show that an agent wasn’t acting on
their behalf. No one can run a business
with those sorts of limitations. But with
help from OAR and NAR, the Supreme
Court reversed this troubling ruling.

Thomas Pyper is partner at
Pyper & Nordstrom LLC, in
Dayton, Ohio. He was counsel
for the broker in the case.

[ tpyper@panlawyers.com]

Had the appellate ruling stood, the limitationson Ohio brokers could have been ruinous.